Americans pay more than a 70 percent share of patented biopharmaceutical profits, despite the fact that the United States accounts for only 34 percent of the overall gross domestic product (GDP) purchasing power within the Organization for Economic Co-operation and Development (OECD). According to the White House Council of Economic Advisors (CEA) report titled "Reforming Biopharmaceutical Pricing at Home and Abroad," pharmaceutical innovators and foreign governments rely on America’s patients and taxpayers to finance critical research and development. In order to reduce drug prices, the CEA noted that current pricing could be artificially inflated as a result of government policies that prevent, instead of fostering, health price competition.
The CEA suggested reforms to U.S. biopharmaceutical policy should consider two simultaneous goals: (1) reduce domestic drug prices and (2) lowering the costs and increasing the rewards of drug innovation. The CEA also discussed changes to the Medicare and Medicaid programs that could help lower domestic prices, as well as reforms to the FDA that could encourage more robust price competition.
Pricing. The CEA report stressed that it is misleading to only consider drug price in a vacuum without evaluating patient health prior to the introduction of the drug. New drugs can reduce the cost of better health even with an expensive drug. The CEA provided the example of an HIV patient in the early 1990s—before breakthrough therapies were developed—the cost of a longer life with HIV was prohibitively expensive. Once new HIV drugs were developed and marketed, the cost of a longer life decreased, especially as competing drugs entered the market.
The U.S. market makes up 46 percent of OECD sales of brand name innovative drugs, funds about 44 percent of world medical research and development, invests 75 percent of global medical venture capital, and holds the intellectual property rights for most new medicines. As such, innovators across the world rely heavily on Americans paying market prices to underwrite the returns on investments into products that improve their health.
The CEA stated that under current Medicaid and Medicare policies price competition is dampened, artificially raising drug prices. For instance, drug makers that choose to enter the Medicaid Drug Rebate Program are required to offer state Medicaid programs their prescription medications at a price that either includes a minimum rebate of 23.1 percent of the average manufacturer price for brand drugs or, if lower, the "best price" the manufacturers offer to any other purchaser. In turn the best price program can create artificially high prices in the private sector under certain conditions; if a large share of a given drug’s market is enrolled in Medicaid a drug maker has an incentive to inflate prices in the private sector so that it can collect higher post-rebate prices from its large Medicaid customer base.
Similarly under Medicare Part B, drugs administered by doctors are reimbursed with a markup above the average sales price (ASP), regardless of any price discounts. For instance, with a 6 percent markup above ASP the doctor receives $600 for administering a $10,000 drug and $60 for a $1,000 drug. This leads to a lack of incentive to control costs and instead an incentive to raise costs.
Medicare Part D also has several provisions that artificially raise costs for patients. The Social Security Act requires Medicare Part D plan formularies to include drugs within each category and class of covered drugs. CMS has interpreted the requirement to include drugs within each therapeutic category and class to mean the inclusion of at least two non-therapeutically equivalent drugs. As a result, Part D sponsors cannot negotiate for lower prices when there are only two drugs on the market since drug manufacturers know that CMS must cover both. This leads to more spending.
Innovation incentives. Limiting foreign government underpricing and reducing research and development costs through FDA policies could encourage innovation. The CEA suggested that meaningful reforms would need to address the "free-riding" that takes advantage of the U.S. drug market. These reforms could include enhanced trade policies that tie public reimbursements in the U.S. to prices paid by foreign governments.
In addition, because clinical trials and FDA review are the most time- and resource-intensive steps, reforms that significantly reduce the fixed costs of entry would be beneficial to innovation. Drug development reforms should aim to lower the cost of entry and enhance price competition of new innovations, including reforms that address prices after patents expire. Generic drugs have been highly successful in driving down drug prices; prices drop rapidly to nearly half after just the second generic introduction. Faster generic drug approvals could decrease the cost of entry and thus decrease drug prices even further.
The CEA concluded that the objective of government in biopharmaceutical policy is to ensure that firms invest in meaningful innovations that lower the price of health, rather than provide incentives that dampen rather than promote competition between innovations. It is bad government policies or insurance programs that prevent, rather than foster, healthy price competition often induce artificially high prices domestically.
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